U.S. Stocks Collapse; Buffett Keeps Buying

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

U.S. stocks collapsed today -- or at least that's what some of the headlines might lead you to believe. Take your pick:

U.S. Stock Prices Tumble After Economic News (Dow Jones Business News)

U.S. Stocks Slammed; Dow Drops Over 200 Points (MarketWatch)

Steep Losses Pull S&P 500 Down To One-Month Lows (RTT News)

I guess those headlines are appropriate -- if you happen to think the 1.43% drop in the S&P 500 (SNPINDEX: ^GSPC  ) qualifies as a "steep loss," or the 1.47% decline in the Dow Jones Industrial Average (DJINDICES: ^DJI  ) amounts to getting "slammed."

However, if your investment time horizon is measured in in years rather than days, weeks, or months, you probably already know that declines of this magnitude are hardly exceptional. In fact, if we analyze the daily trading history of the S&P 500 beginning in Jan. 1950, we find that losses that exceed today's occur on roughly 5% of all trading days. Put that way, such losses might sound quite rare; but if I tell you that it's something that occurs once a month, on average, you might begin to think about them differently.

Furthermore, despite August's reputation as a quiet month, that frequency is actually slightly higher if we restrict ourselves only to August days. The bottom line is that it's counterproductive to get worked up over today's stock market decline, which is not unusual, assuming your time horizon is longer than the next few days.

Sure, the CBOE Volatility Index rose 13%, to close at 14.73. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.) However, I had warned investors that the VIX looked underpriced at the beginning of the month; even after today's increase, it remains substantially below its long-term average.

Instead of listening to traders, watch the long-term investor
Meanwhile, after a delay due to a technical glitch, interested traders and investors finally got access to Berkshire Hathaway's (NYSE: BRK-B  ) stock holdings at the end of the second quarter. (Berkshire, along with other investment managers, reports this data to the SEC on a quarterly basis.)

Berkshire CEO Warren Buffett certainly isn't shying away from the stock market. In aggregate, Berkshire spent $4.64 billion on stocks in the second quarter, ending June with an equity portfolio valued at $101.9 billion. Buffett, and the two investment managers he employs -- Todd Combs and Ted Weschler -- are not concerned with the day-to-day "noise" of broad market moves; instead, they focus on identifying high-quality businesses trading at reasonable (or better yet, unreasonably cheap) valuations.

Among other purchases, Berkshire raised its stake in General Motors (NYSE: GM  ) by 60% and initiated positions in Suncor Energy (NYSE: SU  ) and Dish Network. The conglomerate also increased its largest stock position, that of lender Wells Fargo, by 1.1%, to 463.1 million shares (current value: $19.9 billion).

If, like Berkshire Hathaway, you're a net buyer of stocks over the next 10 years, a little volatility is nothing to be concerned about -- it's an opportunity to get better prices on your purchases. Solid companies selling at depressed prices have consistently helped generations of the world's most successful investors preserve capital, minimize risk, and achieve long-term, market-trampling returns. To find out why Berkshire itself fits the bill, read our free report, "The One REMARKABLE Stock to Own Now." Just click here to get started.



Read/Post Comments (2) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2598011, ~/Articles/ArticleHandler.aspx, 8/28/2014 1:10:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement